Tax Type
Machinery Tools Tax
Description
M&T tax on both the original equipment cost and the replacement parts questioned
Topic
Classification
Local Power to Tax
Local Taxes Discussion
Records/Returns/Payments
Date Issued
11-13-2012
November 13, 2012
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
Machinery and Tools Tax
Dear *****:
This final state determination is issued upon the application for correction filed by you on behalf of your client, ***** (the "Taxpayer") with the Department of Taxation. You appeal ***** (the "County") assessment of certain equipment for purposes of machinery and tools tax for the 2007 through 2010 tax years.
The machinery and tools tax is imposed and administered by local officials. Virginia Code § 58.1-3983.1 authorizes the Department to issue determinations on taxpayer appeals of machinery and tools tax assessments. On appeal, the machinery and tools tax assessment is deemed prima facie correct, i.e., the local assessment will stand unless the taxpayer proves it is incorrect.
The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections and public documents cited are available on line in the Laws, Rules and Decisions section of the Department's web site, located at www.tax.virginia.gov.
FACTS
The Taxpayer, a manufacturer located in the County, filed amended machinery and tools tax returns for the 2007 through 2010 tax years requesting removal of certain equipment included on the original returns as machinery and tools. The County agreed to some of the Taxpayer's amendments and refunded the associated tax but declined to allow the removal of all of the equipment requested by the Taxpayer.
The Taxpayer filed an appeal with the County. In its final determination, the County made additional adjustments to the machinery and tools tax assessments for the 2007 through 2010 tax years.
The Taxpayer appeals the County's final determination, contending certain equipment was incorrectly classified by the County as machinery and tools. It asserts that certain equipment was not machinery and tools because it was used in packaging and shipping. In addition, the Taxpayer disagrees with the County's treatment of replacement costs for certain assets. The Taxpayer believes the County should not be permitted to assess machinery and tools tax on both the original equipment cost and the replacement parts that are necessary for the continuing operations of the equipment. Finally, the Taxpayer requests that the County accept its affidavits as sufficient evidence regarding the location of the equipment that was moved to another jurisdiction.
ANALYSIS
Taxation of Machinery and Tools
All tangible personal property, unless declared intangible under the provisions of Va. Code § 58.1-1100 et seq., is reserved for local taxation by Article X § 4 of the Constitution of Virginia. Included in the category of tangible property that is declared intangible and subject to state taxation only is "[c]apital which is personal property, tangible in fact, used in manufacturing (including, but not limited to, furniture, fixtures, office equipment and computer equipment used in corporate headquarters) ….” See Va. Code § 58.1-1101 A 2.
The machinery and tools, motor vehicles and delivery equipment of a manufacturing business are not defined as intangible personal property. Such property is to be taxed locally as tangible personal property. Virginia has elected to create a separate classification of tangible personal property for machinery and tools used in manufacturing. Virginia Code § 58.1-3507A also provides:
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- Machinery and tools . . . used in a manufacturing . . . business shall be listed and are hereby segregated as a class of tangible personal property separate from all other classes of property and shall be subject to local taxation only.
Used in Manufacturing
In City of Winchester v. American Woodmark, 250 Va. 451, 458, 464 S.E.2d 148, 152 (1995), the Virginia Supreme Court (the "Court") stated, "Since 1950, the Tax Commissioner has opined that the phrase ‘machinery and tools' contained in Va. Code § 58.1-1101 A 2 and its precursors, means machinery used in the actual process of manufacturing." The Court also cited previous opinions of the Attorney General in deriving the meaning of "used in manufacturing."
In The Daily Press, Inc. v. County of Newport News, 265 Va. 304, 576 S.E.2d 430 (2003), the Court amplified the principles set forth in American Woodmark:
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- The principle gleaned from American Woodmark can be simply stated: personal property that may be essential to the overall operations of a manufacturing business is not ‘machinery and tools' subject to local taxation unless the property is actually and directly used in the manufacturing process where new materials are transformed into a substantially different product or the property is connected with the operation of machinery actually and directly used in the manufacturing process 265 Va. 304, 311. [Emphasis added.]
The Attorney General has consistently opined that "machinery and tools" used in a particular manufacturing business are the machinery and tools that are necessary in the particular manufacturing business and which are used in connection with the operation of machinery that is actually and directly used in the manufacturing process. Id., citing 1985-1986 Att'y. Gen. Ann. Rep. 316 at 317; see also 1987-1988 Att'y. Gen. Ann. Rep. 590. Id.
This language does not imply that each piece of machinery or each tool used directly in the manufacturing process must be directly connected to the complete transformation of a material into something substantially different in character. In Public Document (P.D.) 04-39 (8/02/2004), the Department found equipment and tools that did not directly transform or even touch the product being produced could be used directly in the manufacturing process. The question, therefore, is not whether a particular piece of machinery transforms a product, but whether such machinery or tool is used directly in a manufacturing process.
Packaging Equipment
The Taxpayer is a manufacturer of plastic bottles. The bottles go through a molding machine where they are formed. After exiting the molding machine, the bottles are transported via a conveyor to area where they are palletized in groups and eventually wrapped, strapped and ready for shipping.
The Taxpayer asserts that the equipment used to palletize the bottles, wrap them and prepare for shipping is not used directly in its manufacturing process because the bottles were completely transformed at the point the bottle exits the molding machine. The Taxpayer contends the palletizers are not used in connection with the operation of equipment used directly in its manufacturing process, but rather are used in packaging and shipping. As such, the palletizers are not subject to the machinery and tools tax. In its final determination, the County concluded that because the Taxpayer's customer required the bottles to be packed in pallets, the conveyors arid palletizers are connected to the finished goods process and, therefore, subject to the machinery and tools tax.
In P.D. 04-39 (8/2/2004) the Tax Commissioner ruled that machinery used for packaging the product for shipping purposes is not directly used in the manufacturing process. The Tax Commissioner held that packaging "has nothing to do with the transformation of the original material into a new product substantially different in character."
In P.D. 08-30 (4/2/2008), the Tax Commissioner reaffirmed the principle established in P.D. 04-39. However, the Taxpayer in P.D. 08-30 was the manufacturer of food products, and the Tax Commissioner recognized that many food products are not marketable without some kind of packaging. Therefore, the Department must consider whether some packaging "is an integral part of the making of a substantially different product." In considering this issue, the Tax Commissioner identified three main factors that contributed to how food was packaged. These include government regulations, industry practices, and market or consumer demands. Thus, to the extent that packaging has to meet performance (industry standards), sanitation (government regulations), or product quality (consumer demands) standards, equipment used for such packaging is considered to be used directly in the manufacturing process.
In P.D. 08-30, most of the products went through several stages of packaging before being placed into cases for shipping. The Department held that equipment used during the cartoning process was a part of the manufacturing process, whereas equipment used for the purpose of packaging the products for shipment was not directly used in the manufacturing process. In addition, though both machines were located in the same area of the plant, only the machinery and tools used in the cartoning process were subject to the machinery and tools tax.
In this instance, once the molding process is completed, the bottles travel on an automatic conveyor belt to a point where they are palletized, wrapped and strapped for shipping. The County argues that Taxpayer's customer requires the bottles to be palletized for its use; therefore, the process is a result of the customer's demand and should be considered as a part of the manufacturing process.
No evidence has been presented to demonstrate that the palletizing function is performed for product quality (consumer demands). Absent of such proof, the general rule in P.D. 04-39 is applicable, i.e., machinery used for packaging the product for shipping purposes is not directly used in the manufacturing process. Accordingly, Department must consider the palletizing and wrapping functions a part of the shipping process and exempt from the machinery and tools tax.
Proper Transfers/Disposals
The Taxpayer replaced some of its molds in 2008 and indicates that the molds were transferred to its location in ***** (State A). The Taxpayer provided affidavits to the County attesting that the molds were no longer located within the County's jurisdiction and requested refund of taxes paid. The Taxpayer cites P.D. 08-88 (6/16/2008), in which the Department accepted affidavits as sufficient evidence of disposed assets. The County has not accepted the affidavits, contending the statements lacked sufficient information to substantiate the change of location and disposal of assets.
Virginia Code § 58.1-3109 6 grants local assessing officers the authority to require records and other information necessary to make an accurate assessment of a taxpayer's tangible personal property. In addition, pursuant to Va. Code § 58.1-3983.1 B 3, a local assessing officer may require the submission of additional information or documentation in order to make a proper and equitable determination of an application for correction.
As such, a local taxing officer is within his or her authority to request and examine a taxpayer's records. Further, issues regarding the disposal of property are a matter of fact to be determined by the locality. An examination of a facility by a locality can indicate if machinery or tools are no longer on the premises, but a taxpayer must provide sufficient documentation to a locality to show when it disposed of the property in question. See P.D. 10-26 (3/31/2010).
Modification Costs
The City upheld its assessment of certain capitalized repairs and rebuilds included in the Taxpayer's request for refund. The Taxpayer asserts that including the rebuilt and modification costs with the original value of the equipment creates an increase in the taxable value of the equipment above the fair market value (FMV).
Fair market value is the Constitutional requirement for valuation of tangible personal property. The valuation of machinery and tools must reasonably approximate fair market value. See Tuckahoe Women's Club v. County of Richmond, 119 Va. 734, 101 S.E.2d 571 (1958). If the valuation methodology employed by a locality results in an assessment well above fair market value, the locality may, use another methodology prescribed in Va. Code § 58.1-3507 B. See P.D. 05-129 (8/3/2005).
In some cases, repairs to an asset may make the FMV of that asset greater than the actual assessed value. Historically, the Virginia Supreme Court has recognized that property is often assessed at less than fair market value and has not objected to such assessments so long as they are applied uniformly. See Norfolk and Western Railway Company v. Commonwealth of Virginia, et al. 211 Va. 692, 179 S.E.2d 623 (1971). In such instances, the assessment will stand. Again, the locality is responsible for finding a methodology for reasonably approximating the FMV of an asset for property taxation.
The Taxpayer avers that all repairs and rebuilds only bring the machines back to standard operating levels, and add no additional value. In the matter of property valuation, the burden of proof lies with the Taxpayer to rebut the presumption of correctness. See § 58.1-3983.1 B 4. In order to do so, the Taxpayer must show by clear preponderance of evidence that the property is assessed at more than fair market value. See Tidewater Psychiatric Institute v. the City of Virginia Beach, 256 Va. 136, 501 S.E.2d 761 (1998). As such, the Taxpayer should contact an appraiser to ascertain the fair market value of the equipment at issue.
DETERMINATION
Based on the evidence presented, I find that equipment and machinery used in packaging and shipping is a part of the shipping process. The evidence provided is not sufficient to find that the palletizing of the bottles adds to the quality of the product. Absent such evidence, the Department finds that the packaging equipment is not used in the manufacturing process and is not subject to M&T tax.
Further, the determination as to the disposal, removal, or transfer machinery and tools and valuation of machinery that has been modified, modernized, or refurbished is a factual matter for the local taxing authority to decide. In this case, the Taxpayer has not provided documentation satisfactory to the County. Accordingly, I am remanding these matters to the County with the instructions that it consider any other documentation the Taxpayer may be able to provide to demonstrate when the molds were transferred out of the Taxpayer's facility in the County. Further, the Taxpayer may provide additional evidence as to the fair market value of the modified machinery.
The documentation or evidence required in accordance with this determination should be provided to the County within 30 days of the date of this determination. If the Taxpayer is unable to provide adequate documentation, the County's determination will be deemed to be correct. Once its review of the additional documentation is complete, the County should provide the Taxpayer with a detailed calculation of the final assessment.
If you have any questions about this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-48507142721.D
Rulings of the Tax Commissioner